Keep your investment fees (otherwise known as the expense ratio) low–this means on everything you have invested: your IRA/401k/403b/457b/taxable investments. This interactive infographic from PBS’s Frontline explains what fees are and why you should keep them as low as you can. If that doesn’t light a fire under your butt and get you looking at what fees/expense ratio you are paying, I don’t know what will.
So, what’s a “low” fee? If you are looking at your employer’s list of 401k investment options, you should be able to compare their expense ratios as well their rates of return. But for a comparison, Mr. Money Mustache likes the Vanguard VTSMX index which has an expense ratio of 0.17%. I have a Fidelity IRA in FUSEX, which has an expense ratio of 0.10%. And my 457b with my employer is in VIIIX, which has an expense ratio of 0.025%.
You might also notice the examples I’ve given are all index funds. That’s because actively managed funds generally have higher fees than a straightforward index fund which simply tracks the S&P 500. You can find a million other articles about index funds, or you can read one book: John Bogle’s Little Book of Common Sense Investing (preferably free from your local library). I read most of it in a weekend, and then immediately switched a bunch of our mutual funds to index funds. Fun stuff.
Well, I think I’ve found something that sort of fills the need I expressed in my previous entry. This calculator from Bloomberg allows for expected salary increases and by playing around with the ‘current age’ and ‘current retirement savings’ numbers, you can get an idea of what your savings would look like if you didn’t add anything for a few years, but then added a larger percentage of income. It’s not perfect, but it’s fun to plug in numbers — well, maybe it’s only fun for me, but thinking about retirement should be fun for everyone, not just the math nerds!
Best of all, this calculator factors in inflation (I always assume 4%) and percentage of current income needed at retirement. If you house is paid off and that’s where you’ll be staying, your cost of living will be far lower in retirement than it is when you’re starting out.
I also really like the option in that calculator to include social security or not. I’m not placing my bets on social security being there when I retire. I’d like to think that it will, but it’s better to assume that it won’t, and possibly have more income than expected in retirement. I’d be pretty upset if I counted on that money, and then find out I won’t be getting it, or only a percentage of it, but I’d be just fine not counting on it and then having the checks show up anyway.
I’ve also learned from my father’s experience with his own social security that it’s better to have an alternative plan when it comes to retirement income. My father retired from his government job not too long ago, and has started his own business as a contractor of sorts. His income from this second career is erratic, but it’s been enough this year that he’s not getting any social security payments right now. He was also caught in a policy that prevented him from starting his business after retirement, so he was basically forced to work another year in his government job. How’s that for a surprise–oh, hey! You have to work another year before you can retire! Fun, right?
If you plan to work in retirement, even if it will only be part time or inconsistent income from month to month, look into the details of social security sooner rather than later. It’s not some magic check that shows up at age 65 no matter what–there are income restrictions and age requirements, among other things, to think about.
There are a lot of retirement and savings calculators online that will let you plug in your monthly (or yearly) savings and investments, and your expected rate of return. There are some that will tell you how long it will take you to become a millionaire. There are others that will ask you when you want to retire and calculate how much you need to save monthly to make that happen. What I haven’t been able to find is a real retirement calculator.
What do I mean by that? Well, assume you’re 25 and you put $2,500 in a Roth IRA, but then you kind of forget about it and it sits for five years. Then you’re 30 and married and realize you need to put more into that IRA! So you start making random deposits, sometimes you get on a monthly routine of adding $100, but other months you don’t add anything, and then right before tax season, you add $1,000. Maybe this goes on for a few years, and then you start to get serious about it at age 35. You invest as much as possible each month–let’s say $500. But the next year, at 36, you get a raise, and up your savings to $600 each month. And you continue to get both small and large raises and increase your savings until retirement. Also, after your mortgage is paid off at age 45, you start investing your former house payment as well, so now it’s up to $2800/month into savings and investments.
Where’s the calculator for that? I’d like to see a calculator that allows for exponential savings amounts, lets me project 15 or so years and plug in the amount that I could potentially be saving per month at age 45. I want a calculator that allows me to add in other retirement benefits I may have, like a pension that grows as my annual income rises.
I can guess at these numbers, but none of the calculators I’ve found–including Excel sheets people have made–allow for this type of input. Most people don’t invest $500/month for the rest of their lives, though maybe some do. People who want to accumulate wealth put away everything they can.
I think it’s funny when people comment that I’m too young to be thinking about retirement. Well, I’m probably too young to be fantasizing about moving to Spain and living out my days near the ocean, but I’m not too young to be putting aside some money each month to fund whatever my retirement fantasy becomes as I get older.
At this point, my husband and I only use pre-tax accounts for retirement savings. We each have an IRA (mine’s a Roth, his is a traditional) and have pre-tax savings through our employers. My husband’s IRA is a managed account through his credit union financial advisor, while mine is through Fidelity.com where I chose a mutual fund in which to put my IRA dollars.
We have our reasons for choosing what we did. I am much more savvy about investing and interested in the process, so I’m comfortable choosing my fund and sticking with it in good times and bad (mostly bad lately… oh well). My husband doesn’t like to think about his finances as much, so he’s more comfortable working with a professional and taking his advice.
I mentioned the 401(k), 457(b), etc. accounts in my previous post about budgeting. The really nice thing about those accounts is that we never even see the money. Instead of seeing the money go into the checking account, and then having to set it aside, it’s taken out of our checks before it even hits the checking account. It’s automatic saving, and we’re actually putting the recommended 15% of our income toward retirement savings already, even though it’s not until Baby Step 4 that Dave Ramsey gets us to retirement savings. This is because we know the value of starting earlier rather than later. Check out the impact of time PDF in this blog entry for a demonstration of the power of time.
Playing around with a calculator like this one can give you a vague idea of how much to be saving. I really like the planning tools that Fidelity.com offers, but those are only available if you have a Fidelity account. Even saving a little is better than saving nothing!